What Is the Wash Sale Rule?

The wash sale rule is a tax rule that prevents taxpayers from claiming a deductible loss when they sell an investment at a loss and then buy the same or a substantially identical security within a short time window.

Under IRC §1091, if you sell a security at a loss and repurchase the same or substantially identical security within 30 days before or after the sale, the IRS disallows the loss — at least for now.

This rule catches far more people than you might expect, especially DIY investors and crypto traders.

Why the Wash Sale Rule Exists

The IRS created the wash sale rule to stop taxpayers from:

• Selling assets at a loss purely for tax purposes, and
• Immediately buying them back to maintain the same investment position.

In short: you can’t harvest a tax loss while pretending nothing changed.

The 61-Day Window That Matters

The wash sale period is 61 days total:

• 30 days before the sale
• The day of the sale
• 30 days after the sale

If you buy during any part of that window, the loss is disallowed.

What Counts as “Substantially Identical”?

This is where people get tripped up.

Examples that can trigger a wash sale:

• Selling stock and rebuying the same stock
• Selling an ETF and buying an ETF tracking the same index
• Selling a stock and buying call options on that stock
• Selling crypto and repurchasing the same coin (see note below)

Examples that usually do not:

• Selling one company’s stock and buying a competitor
• Selling an S&P 500 ETF and buying a total market ETF (facts matter)
• Selling stock and waiting more than 30 days to repurchase

What Happens to the Disallowed Loss?

The loss is not gone forever — it is:

• Added to the basis of the replacement security, and
• Preserved until you later sell that replacement investment in a non-wash-sale transaction.

This means the tax benefit is deferred, not eliminated.

Wash Sales and Retirement Accounts (Big Trap)

If a wash sale occurs because you repurchased the investment inside an IRA or Roth IRA, the loss is:

• Permanently disallowed
• Not added to basis
• Lost forever

This is one of the most expensive and least understood tax mistakes investors make.

What About Crypto and the Wash Sale Rule?

Currently, the wash sale rule technically applies to securities, not digital assets. However:

• The IRS increasingly treats crypto like securities for enforcement purposes
• Proposed legislation would explicitly apply wash sale rules to crypto
• Many tax professionals already advise treating crypto as subject to wash sale principles

Bottom line: relying on this loophole is risky and shrinking fast.

Common Wash Sale Mistakes

• Automated reinvestments inside brokerage accounts
• Tax-loss harvesting without turning off dividend reinvestment
• Multiple accounts (taxable + IRA) creating accidental overlaps
• Robo-advisors triggering reinvestments you didn’t intend

How to Avoid Wash Sales

• Track trades across all accounts
• Disable automatic reinvestments before harvesting losses
• Wait at least 31 days before repurchasing
• Consider alternative (not substantially identical) investments
• Coordinate taxable and retirement account activity

Final Thoughts

The wash sale rule doesn’t punish investors for losing money — it punishes them for trying to deduct the loss incorrectly. With modern trading platforms and constant reinvestments, accidental wash sales are more common than ever.

If you actively trade, invest in ETFs, or harvest losses, this is a rule you cannot afford to ignore.

At Dino Tax Co, we help clients navigate tax matters ranging from unfiled returns to IRS letters and levies and everything in between with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call or text (713) 397-4678 or email davie@dinotaxco.com. We’re here to help you take the next step.